Reliance, RCom accused of corporate misgovernance

Reliance Industries shares fell 1.6 percent on Thursday. The BSE Sensex fell only 0.5 percent. A couple of issues could bother investors in the Mukesh Ambani-led Reliance Industries and Anil Ambani-led ADAG Group in the coming days.

Three days ago, a little known Canadian Research outfit, Veritas Investment Research, published a report titled “Brothers in Arms, Misappropriating a Fortune”. The report alleged that Reliance Communication has inflated its profit and some key ratios such as operating profit, EBIDTA (earnings before interest, depreciation and tax), earning per share and book value by accounting manoeuvres and poor governance during 2006-2010.

[caption id=“attachment_46108” align=“alignleft” width=“380” caption=“Reliance Industries chairman Mukesh Ambani (L) and Reliance Communications chairman Anil Ambani, are pictured in this combination image of file photos. Denis Balibouse/Adeel Halim/Reuters”] [/caption]

The detailed report is available for subscribers only on the research outfit’s website . However, on Thursday, the press seems to have got access to some excerpts.

“Reliance Communications Limited (RCom) is the poster child of everything that is wrong with corporate India, and irrespective of management’s assertions about “values” and “integrity” in various annual reports, we find no credible evidence of either in its financial statements or those of its former parent, Reliance Industries Limited,” according to a report in a publication called MoneyLife.

A Reliance Communication spokesperson said Veritas had published a “malicious and motivated report containing baseless allegations, masquerading as research”, according to a report in The Economic Times.

The report also makes an argument that RIL’s minority shareholders were at the receiving end of the demerger of RCom from Reliance Industries. According to Veritas, for the 821.48 million shares issued to management at the formation of RCom, RIL shareholders suffered a loss of Rs25,204 crore based on the 6 March 2006, RCom closing price of approximately Rs307.

Veritas estimates that during the formation of RCom, RIL shareholders invested Rs13,675 crore into the business, compared to a paltry Rs186 crore by the management, but after listing on the BSE, the shareholding of minority RIL shareholders declined to 37 percent from 61.73 percent.

To add to all this, Saudi Arabia is putting pressure on India to remove the anti-dumping duty levied on polypropylene, a key organic chemical manufactured by Reliance Industries, according to The Economic Times. Reliance has a 70 percent market share in India with a capacity of one million tonnes. The report argues that diplomatic ties between India and Saudi Arabia are hurt by this issue.

Any relaxation in the import duty could put pricing under pressure for Reliance Industries. This could be negative for companies profitability too. Polypropylene contributes a significant chunk to the overall chemicals segment of Reliance Industries that contributes 25 percent of the total Rs 45,000 crore operating profit of Reliance Industries for the year 2010-11.